Sunday, January 10, 2016

Investing in Real Estate Foreclosures

   There were more than a million foreclosed or "distressed" properties that hit the market this past year. And about the same amount or maybe more will be going on the market this year. These homes come in all shapes and sizes from two bedroom cottages to million dollar mansions. While the big banks may own a large majority of them and may be preparing to sell most of them at auction, the majority of them, in fact the best of the lot will be sold many months before the auction date.
   Homeowners who are unable to refinance due to reasons not under their control but have plenty of equity will probably just put their houses up on the market for sale. Other sellers who most likely are underwater (meaning that their homes are worth less than what the market will pay for their mortgage balance) will likely plead with the banks to allow them to do a "short sale". The majority of those homeowners that can't sell their homes in time will probably be foreclosed upon. When this happens the property owners are evicted and their homes will be auctioned off. The sale of these properties will either be done on the steps of the courthouse or through private sales. Bidding on these homes typically starts at or below the actual still outstanding mortgage, plus any fees and any court costs. This typically inflates the price of the home and wouldn't be considered any type of deal considering that most of these properties need rehabilitation of some sort.
   In the majority of these foreclosed homes the bank will hire a real estate agent to sell it and usually will sell it for far less than what's owed on the mortgage. So let's look at what opportunity at any stage of the foreclosure will most likely give the buyer the best deal.
   The best stage in the foreclosure process that will offer both the worst and the best of the often messy business of investing in foreclosed homes is the pre-foreclosure. If you can contact a homeowner as soon or even before their payment troubles hit public knowledge which is usually when a "notice of default" listing hits the local newspapers. You'll be way ahead of all the competition if you can find a home in this pre-foreclosure situation and you can probably make a better deal at this point. It is of course a disadvantage to you since the homeowner will be in denial of the situation he faces and may feel that instead of giving his home away (selling for less), he can rescue his family. It will also be a reality that most homeowners are wary of strangers approaching them with quick solutions. Because many hapless owners are already on edge that's when the real fraudsters start showing up often posing as foreclosure specialists and often trying to entice the homeowner into trusting their fate on a way out. These low-lifes will take money from the homeowner and will do nothing to help them.
   At this point in the process is when a would-be can actually help the homeowner and do some good things to help him avoid the taint of a foreclosure. A foreclosure, like a bankruptcy will stay on your credit report for years and bring down your FICO score. Although at this point you are being forced to sell and may be a heart wrenching experience, a fair offer can most likely create a pathway to financial recovery instead of financial ruin. Buyers are warned however that all that is owed the seller is a reasonable offer and they should not get involved in the seller's personal problems.
   To avoid direct contact with a distressed seller there is always another option, which would be the short sale. Homes on short sale are put on the market with the help of a real estate agent. These homes are priced below what the owner owes on the mortgage and the price has to be approved by the bank. This is advantageous to the buyer because if he does his due diligence the buyer can make an offer directly to the bank bypassing the seller. The only problem with this scenario is that everybody and their brother is shooting for the same deal and the bank may wait for the best offer. The only drawback with short sales is that even if your offer is accepted it may take weeks or even months for the bank to respond to your offer.
   If you want to invest in foreclosures, it will require some sophistication and an uncanny ability that is beyond what most people possess. To be able to succeed in the foreclosure investmet market you have to study the strategies and tactics that are used by other successful investors and you need to put time and resources into making market contacts. This is a real necessity to be able to create a competitive advantage over the totally of market competition that exists in this real estate niche market. If you put the time and money into getting to know the local property market where you'll competing will be only one of several strategies that investors will need to win in this market space.
   To be able to invest in the foreclosure business and come out ahead can be a positive and rewarding experience. To succeed in this area, your approach must mirror any significant investment. Your strategy will require focus, diligence, and strategic research into the local property location and must include the economic conditions and the demographic trends occurring at that time. The trick is to form a strategy for acquiring properties and then for eventually selling them.
   If you've ever bought a car at an auto auction, investing in foreclosures is a similar type of investment but with a higher price tag and more money and research involved. You definitely need the knowledge to be able to take a gem and make it a jewel. The secret is to take the property at a significantly lower price than it's value. To be able to make money you have to significantly win more good deals than bad because you will not win all the time but if you are a smart investor the winners will overshadow all the losers. If you are seeking that one deal that turns out to be a lemon and you lose your shirt on it, you may not have more money to buy anymore shirts.
   The knowledge of the investment and the risk in mitigation strategies is important because many foreclosure buyers go to the courthouse steps without any idea as to the property's intrinsic value and the auction price, This is a dangerous move for any investor. Well-seasoned investors in the foreclosure market will never make the mistake of relying on price differential as the main source of investment income. Buying properties takes more than picking cherries. Investors need to select properties that are in a locale that is destined for redevelopment or improvement. The property selected needs to have unique qualities in the neighborhood it is situated in and must stand out from the rest of the homes or it has to present some opportunity to create value.
  The strategies used for foreclosure property investment includes the goals and manner for acquiring property, holding the investment, and then selling that investment for a substantial profit. This type of strategic investment is most important in the foreclosure business. The location is of strategic importance because market trends tend to shift quickly and can affect price.
   Researching your investments in the local market of purchase is paramount. Supply and demand becomes very important in the real estate market and can affect the investment return in that local area, I can't emphasize enough that the things you will need to consider are the function of population growth, job growth, disposable income and demographic changes which can greatly affect the price as well as the ability to sell properties when your investment is ready to go on the market. Your research must include the probability for infrastructure development, such as roads, traffic conditions, schools, community support and projects and the support of local and state governments. Business growth in the area and the future growth and repair of any particular issues are important as is air quality, crime in the area, taxes or any other property or locality improvements will affect the value of your investment property.
   In the flow of the foreclosure process in acquiring the property most investors are taught to scour publications that list the assets that will be on auction and to inquire about your intent to purchase the property before it goes to auction. Although deals do occur at the courthouse steps finding a way to eliminate the competition will greatly enhance the investors chances of getting a better deal and will enable the investor to properly inspect the property before taking title.If it is possible to help the home owner re-negotiate their mortgage with the lender that enhances the investors chances for future referrals from other distressed sellers. This will also result in magnifying the investors reputation with both owners and lenders because you will have gained the owner' and the lender's trust. As a result the lenders may be willing to let you purchase some distressed loans at a discount. Most banks and lending institutions do not like acquiring foreclosures. To avoid REO properties some institutions will sell the non-performing loans at a significant discount.
   After the property is acquired it can be rehabbed and flipped immediately or it can be held and seasoned awaiting market conditions to change favorably in order to sell. The smart way for investors to make more money is to find ways to improve the property to make it more favorable, marketable and more valuable. The improvements can include more bedrooms, more bathrooms, remodeling kitchens and or bathrooms, finishing basements or other unused space.
   To hold the property for longer periods you may decide to turn it into a rental unit until the market conditions change favorably for your investment. The demand for rentals in the area must be there and the price should cover the mortgage payment and maintenance. A rental will need rehab after the rental agreement has ceased so count on a small sum for security so you can get it back into selling condition. Landlord duties are a drain on time and money so make sure the rental price includes enough for maintenance and property management.
   Having an exit strategy for selling your foreclosure investment is very important. Time is money and making sure that it goes up for sale in the minimum amount of time off market is crucial to making a bigger profit off your investment. When you invest in non-performing real
estate assets to build some wealth makes perfectly good sense. However, it will never become a quick rich scheme and the only way to succeed is to execute a carefully crafted plan to acquire properties with the goal to have an exit strategy designed to achieve very specific investment goals. For every success story, there are many more who have lost out on their investment because they do not plan strategically and keep abreast of the changing market or have a plan to mitigate the risks inherent in foreclosure investing.


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